Expenditure for earning interest income allowed u/s 57(ii) as nexus of loan & FDR not doubted

Expenditure for earning interest income allowed u/s 57(ii) as nexus between loan taken and amount invested in FDR not was doubted

ABCAUS Case Law Citation:
ABCAUS 3315 (2020) (05) ITAT

Important case law relied upon by the parties:
CIT Vs. RajendraPrasad Moody, [1978] 115 ITR 519 (SC)
astern Investments Ltd. v. CIT [1951] 20 ITR 1, 4 (SC)
Vodafone South Ltd. vs. CIT, [2015] 3781TR 410
Raj Kumar Sharma vs. ACIT

In this case, the appeal was filed by the assessee against the order of the Commissioner of Income Tax (Appeals) in confirming the disallowance on account of expenditure claimed by the assessee u/s 57(iii) of the Income Tax Act, 1961 (the Act).

It was the case of the assessee that the interest expenditure had been incurred wholly and exclusively for the purpose of earning the interest income.

The assessee was an individual and had earned income under the head salary, house property, capital account and other sources during the year under consideration. 

The Assessing Officer (AO) selected the case of the assessee for scrutiny under CASS and accordingly notice u/s 143(2) of the Act was issued. 

During the year under consideration, assessee had taken loan  from  NBFCs for the purpose of making investment. However, due to non-materialization of deal the available funds of the assessee were invested by him in Fixed Deposit so as to earn interest income from the same.

After setting off the interest earned on FDRs to the interest paid on loan from NBFCs, the assessee incurred net interest loss.

However the AO made the disallowance u/s 57 of the Act by holding that the expenses were incurred for the purpose of investment was not substantiated by placing any material on   record except the FDRs.

The assessee filed an appeal before the CIT(A), who vide the impugned order upheld the addition.

The Tribunal observed that that the revenue authority had not doubted the nexus between the loan taken from NBFCs and the amount invested in FDR.

The Tribunal on the strength of the judgment of the Hon’ble Supreme Court, stated that it is a settled law that the deduction u/s 57(iii) of the Act will be allowable even if no income is earned by the assessee u/s 56 of the Act. The language of section 57(iii) of the act does not anywhere specifies that any income should have been earned as a result of the expenditure incurred.  It only specified that the purpose of expenditure should be that of earning income, it is mandatory that income should have been earned by the assessee.

Accordingly, the Tribunal opined that the addition in dispute was contrary to law and facts and therefore deleted the same.  

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